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Global rating agency Moody's Investors Service has affirmed the long-term local and foreign currency bank deposit ratings of Central Bank of India (CBI) and Indian Overseas Bank (IOB) at Ba3, and changed the outlook to positive from stable.
“In the case of IOB, Moody's has also affirmed the bank's senior unsecured debt rating at Ba3 and changed the outlook to positive. It issues its senior unsecured debt out of its Hong Kong branch. Moody's has also affirmed the two banks' baseline credit assessments (BCA) at b3 and their counterparty risk assessments (CRA) at Ba2(cr)/NP(cr),” the agency said.
Upward pressure on credit assessment
The positive outlook reflects the upward pressure that could develop on these banks' long-term ratings, if their credit fundamentals -- namely their capital positions -- continue to improve over the next 12-18 months due to capital infusions from the Indian government (Baa2 stable), India Ratings said.
The positive outlook also reflects Moody's view on the expected evolution of their balance sheets, including a stabilization in asset quality, a moderate improvement in profitability metrics, and stable funding and liquidity positions.
According to the recapitalisation plan announced in October 2017, the government has committed to infuse Rs 1.53 lakh crore into the public-sector banks by March 2019. It will inject Rs 80,000 crore into 20 of such banks by March 2018 in the form of recapitalization bonds. In addition, it will infuse another Rs 10,000 crore from budgetary sources by March 2018.
And, after factoring in the amount already allocated, the government will infuse another INR650 billion in new capital in fiscal 2019. Its budget for fiscal 2019 already reflects this amount, although the details on the timings and scale of allocations to individual banks have yet to be released.
On January 24, the government provided details on how much capital each public sector bank will receive in the current fiscal year ending March 2018 (fiscal 2018).
Based on the announced allocations, CBI will receive Rs 5,160 crore and IOB will receive Rs 4,690 crore in new capital.
Moody's estimates the capital infusion will increase the common equity tier 1 CET1 ratio for CBI by 280 bps and for IOB by 320 bps compared to the reported ratios of 7.0 percent and 7.1 percent, respectively, as of September 2017.
Furthermore, the government has made it explicit that all public sector banks will meet their minimum regulatory capital requirements after factoring in the provisioning requirements for non-performing assets (NPAs), as well as requirements resulting from the transition to IFRS 9 accounting standards in April 2018.
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